It’s been more than three months since the revolutionary Goods and Services Tax (GST) was enforced in the country. Income from rental property is one of the biggest sources of income for a number of people in the country and has become a dynamic market over time. The income from this source is taxed under ‘Income from House Property’ under the Income Tax law. Implementation of GST has changed the way people would be taxed in India.
The purpose behind enforcing GST in the Indian tax system is to make taxation more uniform and transparent. Under the former law, landlords earning an annual rental income of more than INR 10 lakhs have to pay service tax on their rental income. Only commercial properties were bound by tax law to pay this service tax whereas residential properties rented out for residential purposes or commercial purpose were totally exempted from paying any type of service tax. However, GST has increased this basic rental income limit and now a majority of landlords do not fall under the purview of service tax unless their rental income exceeds INR 20 lakhs.
Residential properties let out for residential purposes are exempted from any type of tax however both commercial and residential properties rented out for commercial use would fall under the purview of GST ad would be taxed at 18%. The landlord is required to issue tax invoice to the lessee at regular intervals regarding the same.
The tax would now be levied on the non-taxable services and goods that are supplied in India or exported exceeding INR 20 lakh limit. The ‘Reverse Charge Mechanism’ has been implemented under GST on rental income on commercial property on rent. This mechanism has been borrowed from the service tax regime and states that any person registered under GST procuring goods and services from any other person registered under GST would also have to pay the required GST of 18%.
Another factor which has a substantial impact on rental income is Tax Deducted at Source (TDS). Unlike GST, where the landowner deducts a tax from the tenant, under TDS, the lessee or the tenants are liable to deduct 10% income tax at the source. If and when the lessee needs to get his/her account audited under Section 44AB of the Income Tax Act, he/she is allowed to take this TDS provision. This is applicable only if the rent of the property exceeds INR 1.80 lakhs annually which is solely applied on the landlord and not the property to let for rent.
For the individuals and Hindu Undivided Families, who do not have to get their accounts audited for any reason, the tax deducted at source would be 5% of the rent paid for the entire year. This would also be applicable where tenancy tenure ends before the completion of a year provided the monthly rent paid exceeds INR 50,000 per year.
This means that while GST might increase the rent paid by the lessee on any type of property for rent in India used for commercial purposes, TDS might just be a sigh of relief for the tenants.